AFR's Banking Crisis of '23 Brief: 19th Edition

A cogent email of curated information on the banking crisis and the response

May 04, 2023

Banking Crisis, Climate Crisis, Polycrisis.

AFR’s Alex Martin and Jessica Garcia make the case for forceful action to address climate financial risk, not the least because it is layered atop may other crises – including an unexpected banking crisis:

The banking crisis of 2023, an event appearing on few bingo cards, has thrown a harsh light on the urgency of managing the multitude of crises that the world now faces – climate change being the most existential of them. Factor in the vexing problem that economists have repeatedly underestimated the economic impacts of climate change and we have a straightforward case for proactively hardening the financial system against its effects …
The term “polycrisis,” popularized by historian Adam Tooze to describe the interlocking challenges the world faces, has never been more relevant. New risks abound – climate change, cybersecurity, and pandemics – and it has become clear this year that financial instability is part of the package, both in the United States, in Europe and in the developing world.

Read the whole piece.

Further Bank Trouble.

PacWest Bancorp, a primarily California-based regional bank comprising about $44bn in assets, stands on shaky ground after its share values dropped this week. CEO Paul W. Taylor said as early as March 22 that deposits had stabilized after a period of outflows. But, now, PacWest is looking for strategic solutions, including a breakup, capital raise, or a possible sale.

The Financial Times reports that Western Alliance, an Arizona-based regional bank with about $71bn in assets at the end of March, is similarly exploring strategic options that may include a sale. But the bank vigorously denies this is the case.

A reminder, since higher interest rates matter for shaky banks: The Fed’s key interest rate hit a 16-year high after it announced a quarter-point hike on Wednesday. No decision on a pause was made, but language in their statement may suggest an openness to a pause on any further hikes.

While midsize banks struggle to hold onto their depositors, Apple’s new Goldman Sachs-backed savings account saw inflows of $1bn in deposits in its first four days.

ICBA insists community banks are doing just fine. It’s a “normal day on Main Street” for small bankers, according to a Marketplace article.

Bank Regulation.

Dodd-Frank gave the government a playbook on how to deal with banking failures. The question now: Why didn’t they use it? American Banker explores why regulators opted for costly bailouts instead of the framework they had in place. Namely: Banks of a certain asset size had to have a resolution plan for a controlled fall from grace, and the FDIC would have the power to liquidate their assets. Tarullo thinks the playbook isn’t viable during widespread stress. Says Columbia Prof. Kate Judge:

"What we've seen suggests that the government is unlikely to allow losses to fall where they will, and is far more likely to take an interventionist approach to facilitating a smooth resolution," Judge said, "even if that means absorbing some losses or failing to honor its playbook."

Robert Kuttner thinks Comptroller Hsu could have have forced the FDIC to consider smaller buyers for First Republic, though how is another matter. “Hsu is one of the officials in charge of rewriting bank merger guidelines. He has now shown his hand as being just fine with more concentration.”

End the Fed as Regulator?

Aaron Klein opines that the Fed may not be the best equipped to handle regulation. The agency’s foremost function is monetary policy, and there are plenty of other agencies that make regulation their wheelhouse, he says.

The American Prospect writes that the Barr report condemns the regulator’s supervision arm as structurally unable to act.

At the very least, Independent Women’s Voice (a conservative group) and 16 other organizations have called on Congress to kickstart an independent audit of the Fed’s role in SVB’s collapse.

Executive Testimony and Pay.

Former SVB CEO Becker and former Signature execs Scott Shay and Eric Howell are slated to testify before Senate banking on May 16 and potentially on May 17th in the House, marking the first time that any of the three has spoken out about the bank failures. While senators want insight, an earlier letter to Becker indicated that some topics, like “confidential supervisory information,” may be off the table. On May 18, Senate Banking will hear from Barr, Gruenberg, Hsu and NCUA’s Harper.

Ahead of today’s Senate banking hearing on “Holding Executives Accountable After Recent Bank Failures,” AFR sent a letter to the Committee urging mandatory clawbacks of incentive-based compensation. Sen. Scott is open to the idea.

Fed Nominees.

Biden is close to elevating Fed Governor Philip Jefferson to vice chair and intends to nominate Adriana Kugler, current U.S. representative to the World Bank, into his vacant board position. Kugler would be the Fed’s first Latina appointee, meeting a demand of Sen. Menendez.

Commercial Real Estate.

Munger of Berkshire Hathaway says banks are still loaded with “bad loans” in commercial real estate as they pull back on lending to developers amid falling property values. Meanwhile, cost of interest-rate hedges – which borrowers have to put up to secure a variable-rate loan – is climbing. Delinquency rates on their loans, writes the WSJ, are likely still low due to interest-rate caps that they may lose when their current hedges end.

Consumer Protection.

The Consumer Financial Protection Bureau released a report on the risks to consumers posed by the use of high-interest financing products – medical credit cards and loans – to pay for medical procedures, peddled by fintechs and other providers. From 2018 to 2020, consumers paid $23bn in transactions and $1bn in deferred interest using these products.

“Fintechs and other lending outfits are designing costly loan products to peddle to patients looking to make ends meet on their medical bills,” said CFPB Director Rohit Chopra. “These new forms of medical debt can create financial ruin for individuals who get sick.”

Reminder: Many of the practices that push these high-cost cards are owned by private equity firms. They call it “revenue cycle management.”

Earlier this year, the CFPB proposed an amendment to one of its regulations that would lower credit card late fees to $8. AFREF and eight other organizations joined in a letter supporting the change.

There’s a new predatory fintech scheme on the scene: direct-to-consumer earned wage access (EWA). When accessed through an employer, EWAs enable workers to access portions of their paychecks early. But the direct-to-consumer alternative, laden with hidden fees, acts like a “lightning-fast payday loan.”

SEC Buybacks and Private Funds.

The SEC finalized enhancements to the disclosures on share buybacks. While the final rules are a long-overdue step toward transparency, they fall short of the original promise, writes AFR. Notes Natalia Renta, senior policy counsel for corporate governance and power at AFREF:

“...The final rule fell short of the more robust disclosures the SEC initially proposed, which would have more comprehensively addressed the information asymmetries that currently exist between insiders and other investors that leave the door open to market manipulation and insider advantages.”

The SEC also voted in favor of requirements for private funds – hedge funds, private equity – to report information about events that may point to notable stress or systemic risk. Another proposed rule would require private fund advisers to share quarterly reports with their investors. Said Andrew Park, senior policy analyst for hedge funds and private equity, in an AFREF news release:

“Private funds are no longer some small corner of the financial industry, but now one of the largest pools of capital with significant impact across the economy and other financial institutions… This change will help regulators gain more transparency into private funds so that they are not blindsided by disruptions to these systemically important financial institutions.”

Signature Mortgages.

Reporting from THE CITY takes the reader into an NYC neighborhood that was once the recipient of Signature mortgages. Their analysis found that Signature often offered repeat loans to landlords “notorious for long histories of violations and lawsuits.” With the mortgages on the auction block by the FDIC, many fret over the future of the “vulnerable rent-stabilized buildings” formerly under the bank’s influence.

Who You Gonna Call? BlackRock.

Bloomberg profiles Larry Fink and BlackRock’s Financial Markets Advisory unit, who have positioned themselves for years to be the ones the government calls to deal with a bank failure. Says Cornell Prof. Saule Omarova:

“BlackRock really does appear to be the go-to when it comes to large-scale, politically salient and systemically important types of asset sales and management,” Omarova said in a phone interview. “It creates this very important potential avenue for BlackRock to cultivate a kind of relational power with the federal government.”

Comments AFR’s Andrew Park: "For the second time in three years, the government is outsourcing key governance functions – this year, it involves the resolution of financial institutions – to BlackRock. For that reason alone, the largest, most interconnected asset manager deserves greater federal scrutiny over how it could pose a risk to the entire financial system."

Financial Justice